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CHART OF THE DAY: The Russell “Value” Index vs. The Russell “Growth” Index

Editor's Note: The chart and excerpt below are from today's Early Look written by Hedgeye CEO Keith McCullough. If you would like to stay a step ahead of consensus we invite you to learn more and subscribe.

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...For your “value” friends who don’t do macro cycle work, please send them my way. I have a very basic lesson I learned a long time ago about thinking a cyclical that is tied to commodity #deflation is “cheap”: it’s going to get cheaper.


As Darius Dale shows in today’s Chart of The Day, the Russell “Value” index is underperforming the Russell “Growth” index by almost 1,100 basis points (that’s the most since, well, global growth really slowed in the summer last time = 2011).


CHART OF THE DAY: The Russell “Value” Index vs. The Russell “Growth” Index  - z dd Chart of the Day




Got Aretas?

“Aretas  meant that competing had shaped you into a better person.”

-Po Bronson


No, the highly competitive nature of this profession hasn’t made everyone a “better person.” The fact is that if you want to see someone’s true character, either give them lots of money and power – or hold their #process to account when they are losing.


This week was a humbling one for me on that front as many men and women who have a lot more money than I’ll ever have gave so graciously to our growing Hedgeye Cares charity. On behalf of my team, thank you for your Aretas. It matters.


In many ways, Homer’s The Iliad and The Odyssey are paeans to aretas. Both Achilles and Odysseus who hone their aretas over the duration of the epic poems. In The Iliad, the questions of why we fight, whom we fight for, and how we maintain honor while fighting help define the aretas. The Odyssey portrays sports prowess, endurance, self control…


The Ancient Greeks did not fear that competition bred immoral behavior. They believed that competition taught it.”

(Top Dog – The Science of Winning and Losing, pg 14)


Got Aretas? - z km golf 1


Back to the Global Macro Grind


So forget that it’s a summer Friday and fire yourself up for some competition this morning! Last I checked, Mr. Macro Market doesn’t take vacation. In many ways, this summer is starting to feel a lot like the summer of 2011.


But why do we “feel” anything about markets? Can’t we just turn our emotions off and not thirst for victory or cringe at the prospect of defeat? I can’t. And unless you were one of these machines just chasing price momentum, you probably can’t either.


What we feel is generally driven by the score of this game. That’s why we play it. Whether you were long SBUX or AMZN into their earnings prints, it’s #timestamped right there in front of you. Yesterday’s Global Macro score was one that left a mark:


  1. Most things #Deflation (Commodities and countries/sectors linked to them) have been smoked this week
  2. Credit markets linked to inflation expectation expectations (Energy Junk Bonds) are back at their YTD lows
  3. Dammit, they even sold off the SP500 for a 3rd straight day!


#NoWorries though, you can buy Amazon (AMZN) on the Barclays upgrade this morning (+18% pre-market) for 1,000x earnings, or something like that. Heck, that’s cheaper than something biotech that has no earnings at all.


I wrote this yesterday and I’ll write it again – in Style Factor terms, if a stock has:


  1. SIZE (big cap)
  2. LIQUIDITY (you can get in/out of your position in 1-3 days)
  3. NICE CHART (i.e. price momentum machines can chase)


You are all set. That’s why I kept Starbucks (SBUX) on the long side of Real-Time Alerts. Is there a legitimate debate on why the stock shouldn’t trade at 55x earnings if people are willing to chase it at 35x?


C’mon, let’s get real here. This has nothing to do with your business school “valuation” models. This has everything to do with what always happens when you can buy neither Global Growth nor Inflation – you have to chase the last growth you can find.


For those of you still keeping score on the GROWTH and INFLATION data, here it is this morning:


  1. CHINA: PMI slowed (again) in July to 48.2 from 49.4 in June
  2. EUROPE: Germany and France saw their PMIs for July slow (again) to 51.5 and 49.6, respectively
  3. JAPAN: PMI accelerated (again) in July to 51.4 from 50.1 in June


Pardon? Buy Japan as both the absolute (rate of change) and relative momentum of its growth factor is beating China and Europe? Yep. That’s the really cool kids’ portfolio – long AMZN, SBUX, and Nikkei!


Oh, did I mention that Japan’s rate of change in growth will be accelerating in the 2nd half of 2015 as the beloved navel gazer market (USA) slows? What the un-cool kids own are basically US cyclicals (I think they’re now called “value” stocks):


  1. Industrials (XLI) down another -0.9% yesterday (down -4.4% in the last month)
  2. Dow Transports down another -2.1% yesterday (down -4.1% in the last month)
  3. Russell 2000 down another -1.1% yesterday (down -3.0% in the last month)


So much for the “global growth is back, buy reflation” idea…


For your “value” friends who don’t do macro cycle work, please send them my way. I have a very basic lesson I learned a long time ago about thinking a cyclical that is tied to commodity #deflation is “cheap”: it’s going to get cheaper.


As Darius Dale shows in today’s Chart of The Day, the Russell “Value” index is underperforming the Russell “Growth” index by almost 1,100 basis points (that’s the most since, well, global growth really slowed in the summer last time = 2011).


I guess that’s why I’m feeling something this morning. I’m all fired up, taking a few shots at the competition (is that impolite while they’re revising GDP growth from 4.0 to 3.0?). Bob, weave, jab – it’s ok to compete. This isn’t Ancient Greece, but it is Wall St.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.24-2.36%

SPX 2093-2130
Nikkei 209
VIX 11.88-14.37
USD 96.62-98.45
Oil (WTI) 48.03-50.95

Gold 1068-1121


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Got Aretas? - z dd Chart of the Day


Starbucks (SBUX) delivered an incredible quarter.  The company posted a significant increase in traffic trends, a trend which requires us to remove Starbucks from our SHORT bench.


This was short lived skepticism for us as we were looking for a downward trend in traffic, lower adoption rates of Mobile Order & Pay, and a decrease in food sales, all of which did not occur. SBUX posted yet another record quarter of performance in 3Q15 reporting yesterday after the close, beating estimates across the board. Q3 revenue was $4.88B versus consensus estimates of $4.87 a 17% increase YoY. Comparable same-store sales (SSS) increased +7% compared to estimates of +6.1%, a 300 basis point increase YoY. Of the consolidated numbers, the Americas segment reported +8% SSS versus consensus of +6.3%, EMEA reported +3% versus consensus of +3.8% and CAP reported +11% versus consensus of +8.5%. Reported EPS ex-items for Q3 was $0.42 versus consensus of $0.41.


As you can see the strong performance was global, with no region disappointing. The growth seen in transactions is possibly the most impressive in the quarter, given the number of stores they have, as they are adding stores cannibalization does not seem to be an issue. Two year traffic trends in the Americas segment are turning positive, evidenced by the chart below:




This is truly one of the best run company’s not only in the restaurant sector but in the world. Management’s great execution across platforms is testament to their long-term strength. And although we are not chart chasers so therefore will not recommend a buy at these levels, we certainly can’t short it here either.


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Cycles, Macro and Multiples

Client Talking Points


This is probably our most contrarian theme that isn’t being bandied about yet – post the Greek clown show, in rate of change terms, European econ data continues to slow; German PMI 51.5 (new year-to-date lows) this morning and France back < 50 at 49.6 JUL vs 50.7 JUN. 


Nasty week for anything linked to this uber-macro risk; don’t forget this is a credit risk signal inasmuch as it is a draw-down one for commodity linked currencies/countries. Russian stocks are down -1.3% this morning (-8.2% in the last month); Brazil -2.1% yesterday (-6.6% month-over-month).


Getting lots of questions on this exposure as the Russell 2000 is now -3% month-over-month (bearish TREND signal) but the “Russell Value” (IWN) is underperforming Russell Growth by 1100 basis points (its widest margin since 2011) – we liked IWM in Q1, but definitely not here.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The General continues to make tough calls as they work to further streamline their manufacturing footprint as part of Project Century. Last week, announcing the closure of two plants, one in West Chicago, IL and the other in Joplin, MO, eliminating approximately 620 positions in the process. West Chicago produced cereal and dry dinner products for the U.S. Retail organization, while the Joplin facility was acquired as part of the Annie’s acquisition and produced snacks. Because of union negotiations management is expecting these actions to be fully executed by fiscal 2019. We view this as a big positive for the company as they go to a more nimble asset light model, which will save on capex and allow it to be allocated to higher growth product platforms.


According to Gaming, Lodging and Leisure Sector Head Todd Jordan, additional state gaming agencies have reported revenues for the month of June. The good news here is that Penn National Gaming remains on track to beat second quarter estimates this Tuesday July 23rd. In addition, PENN will be hosting an investor day on July 24th. We will be there and communicate any noteworthy color and developments. Bottom line? The company remains one of our favorite names on the long side and boasts the best new unit growth story in domestic gaming.


After an awful retail sales print on Tuesday, the confluence of growth slowing data reared its ugly head Friday with a +0.1% year-over-year headline CPI print for June and a UofMich consumer sentiment reading that declined to 93.3 from 96.1 in May. Note that a +0.1% inflation rate is a heck of a long way from the Fed’s 2% target. These two prints were successful in taking the 10-Year Treasury yield down 10 basis points from Monday’s highs to finish the week at 2.35%. We remain one of the lonely bulls on Treasury bonds (bearish on yields) via TLT, EDV, VNQ.

Three for the Road


TREASURIES: good wk for $TLT bulls, 2.28% 10yr as both global growth and inflation slow



Living at risk is jumping off the cliff and building your wings on the way down.

Ray Bradbury


0.3% of solar energy from the Sahara is enough to power the whole of Europe.

MCD | Right on Track


MCD is on the Hedgeye Restaurants Best Ideas list as a LONG.


McDonald’s (MCD) reported 2Q15 earnings result yesterday, performing more or less in-line with our expectations. Global same-restaurant sales (SRS) decreased 60 basis points YoY to -0.7%, versus consensus of -0.4%, reflecting negative guest traffic in all major segments. Although negative, it is a marked sequential improvement versus the -2.3% seen in 1Q15. We will break down the numbers by segment later in the note. Company-operated restaurant revenue of $4.26B outperformed consensus estimates of $4.16B, yet still down roughly 11% YoY. Franchise operated revenue came in right on target matching consensus at $2.24B down roughly 6.5% YoY. 2Q15 EPS was $1.26 beating consensus of $1.23 by $0.03, but declining 10% YoY. 


Management highlighted that 80% of the decline in operating profits came from two countries, U.S. and Japan.  Highlighting that MCD is strong company with just a few regions of the world causing the company’s growth related issues. 


U.S. 2Q15 SRS decreased -2.0% versus consensus expectation of -1.5%, sequentially seeing a minor 60 basis point improvement. These results reflect negative guest traffic, as new products and LTO’s did not achieve the lift expected. All-day breakfast tests have been going well, and we are optimistic on the effect its rollout would have on the performance.


MCD | Right on Track  - CHART 1


Europe 2Q15 SRS sales increased +1.2%, just shy of consensus estimates of 1.5%, a notable improvement sequentially, coming off four consecutive quarters of negative comps.  Results are being affected by continued economic challenges in key markets, and charges as part of the global business turnaround plan.


MCD | Right on Track  - CHART 2


APMEA 2Q15 SRS decreased -4.5% versus consensus of -3.4%, again showing improved trends sequentially, as the effects of the supplier issue continue to dissipate in Asia.


MCD | Right on Track  - CHART 3


After listening to the call there are obviously still issues to figure out, especially domestically in the U.S., as turnaround efforts have not performed well to date. But we are very encouraged by positive performance across the International Lead Markets segment, in which management stated quarter to date performance is positive and showing strength.


Notable comments during the call:

  • Financial results remain disappointing but they are seeing early signs of momentum, expecting to see positive growth globally in Q3, led by International Lead Markets and High Growth Markets.
  • International Lead Markets segment is moving in the right direction, Australia, Canada and UK are seeing strong performance, France is gaining share and Germany is turning the corner.
  • UK, 37 consecutive quarters of positive comps.
  • Canada focusing on convenience, rollout of dual lane drive-thrus, strong breakfast growth, free coffee promotion earlier this year and new salads on the core menu.
  • Germany, 1st quarter since 2Q12 of positive comps.
  • Developmental license agreement for 100 new sites along the Autobahn in Germany.
  • China as a whole had a -3% comp in 2Q15, the top five cities which represent 50% of sales are flat quarter to date. While lower tier cities are being effected by macro-economic factors and not recovering as quickly.
  • U.S. remains disappointing, low price structure implemented this year was an important first step. Northwest region was top performing, having positive results in the first month of Q3.
  • Launching mobile app in Q3, designed to streamline customer service experience. Initially will have limited capabilities, but will be updated over time to include mobile ordering.
  • Expanding all day breakfast into a limited number of new markets to learn more.


We at Hedgeye believe Q3 will be the inflection point to this turnaround, as a lot of the little things management has implemented will have ample time in the market to take full effect.


July 24, 2015

July 24, 2015 - Slide1

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